PTC INDIA LIMITED,DELHI vs. DCIT, CIRCLE-19(1), NEW DELHI

ORDER

PER MANISH AGARWAL, AM :

1. That on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) ["Ld. CIT(A)"] has erred in upholding the addition of Rs. 17,09,49,711/- under section 14A of the Income-tax Act, 1961 ("the Act") read with Rule 8D of the Income-tax Rules, 1962 ("the Rules") based on the incorrect appreciation of facts and law and hence this action of Ld. CIT(A) is illegal, bad in law and deserves to be deleted.

2. That the Assessment Order passed and the addition/disallowance made under Section 14A of the Act are illegal, bad in law and is liable to be deleted.

3. That the Ld. CIT(A) has failed to take a judicious view of the facts and circumstances and the Ld. CIT(A) has failed to consider the legal position and various judgments pronounced by various courts. The Ld. CIT(A) was not justified in law in upholding the addition of Rs 17,09,49,711/-.

3225/Del/2024 b. That the majority of investments were made in the past years which yielded the dividend in the subject year and no direct or indirect expenditure was incurred by the Appellant in connection with making and/ or administering these investments in the captioned year. c. That the AO has not pointed out any error/defect in the computation of expenses suo-moto disallowed by the Appellant, which clearly shows correctness of expense suo-moto disallowed by the Assessee. d. That the Appellant has suo moto disallowed a sum of Rs.49,51,789 in the Return of Income ('ROI) based on the similar methodology (certified by the practicing Chartered Account) which was duly accepted by the AO pursuant to the order of Hon'ble Income Tax Appellate Tribunal, Delhi in Assessee's own case for AY 2008-09 to AY 2010-11.

6. That without prejudice to our rights, the addition of Rs 17,09,49,711/- is highly excessive and should be reduced substantially.

10. Without prejudice, the disallowance made under Section 14A of the Act is also highly excessive.

6. All the grounds of appeal of the assessee are with respect to the confirmation of the addition of INR 17,09,49,711/- made by the AO u/s 14A of the Act computed by invoking the provisions of Rule 8D of the Income Tax Rules, 1962, thus they are taken together and decided as under.

7. Brief facts of the case are that the assessee has declared exempt income of INR 81,56,75,328/- and claimed finance cost in its P&L Account at INR 117.28 crores. The assessee suo motto disallowed INR 49,51,789/- u/s 14A of the Act and added back to the total income. This amount is disallowed as per the certificate issued by a Chartered Accountant dated 19.03.2021 according to which common indirect expenses were to the tune of INR 1,87,40,905/-. The Auditor further observed that the exempt income is of 18% of the total income declared therefore, he proposed the disallowance of direct expenses of INR 15,41,654/- alongwith 18% of the indirect expenses of INR 1,87,40,905/- as amount of disallowance u/s 14A and accordingly, assessee has made total disallowance of INR 49,51,789/- in the return of income filed.

8. It is relevant to state that assessment order is passed on 25.03.2021 whereas certificate of the Auditor placed before us on 3225/Del/2024 19.03.2021 and it is not clear whether same was filed before the AO or not. AO after recording the satisfaction for invoking the provision of section 14A has made the disallowance by following the computation as provided in Rule 8D of the Rules and accordingly, a sum of INR 17,09,49,711/- is further added to the total income of the assessee. Ld. CIT(A) confirmed the action of the AO, therefore, the assessee is in appeal before us.

9. During the course of hearing, Ld.AR has made multi-folds arguments and the very basis for argument is that AO has not recorded his satisfaction about the correctness of the claim of the assessee as envisaged in section 14A of the Act according to which AO must record his satisfaction that the claim of the assessee with respect to the expenditure in respect to income which does not form part of the total income is incorrect. He further submits that the assessee has already made the disallowance based on the certificate issued by the Auditors and therefore, no further disallowance could be made.

11. Ld.AR for the assessee also submits that in preceding years, disallowance of similar nature was made which stood deleted by Co- ordinate Bench and thus, following the principal of consistency, the disallowance made in this year should be deleted. He prayed accordingly.

“14A. Expenditure incurred in relation to income not includible in total income. (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

3225/Del/2024 (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.”

3225/Del/2024 held that for the purpose of computing the disallowance u/s 14A of the Act, the investments which has yielded exempt income should only be considered for the purpose of computing the amount of disallowance in terms of rule 8D(2)(ii) of the Income Tax Rules, 1962. Thus, by respectfully following the aforesaid judgements of hon’ble jurisdictional high court and of the special bench of Tribunal, we direct the AO to recompute the amount of disallowance as per Rule 8D(2)(ii) of the Rules by considering those investments which yielded exempt income. With these directions, all the grounds taken by the assessee are partly allowed.

[Assessment Year 2018-19] [Revenue’s appeal] 20. In appeal filed by the Revenue, solitary ground of appeal taken is with respect to the deletion of the addition of INR 1,94,37,33,111/- made on account of surcharge on delayed payments from the debtors.

21. Heard the contentions of both the parties and perused the material available on record. At the outset, it is seen from the order 3225/Del/2024 of Ld. CIT(A) that he has followed the order of Assessment Year 2015- 16 vide order dated 26.09.2018 wherein Ld. CIT(A) has deleted the additions made by AO following the order of Co-ordinate Bench of the Tribunal. Ld. CIT(A) has observed that there is no change in the circumstances as existed in the preceding years and the year under appeal. It is further seen that Co-ordinate Bench of Tribunal in assessee’s own case in while deleting the additions made, placed reliance on the judgement of the Hon’ble Punjab & Haryana High Court in the case of DCIT vs M/s Dakshin Haryana Bijli Vitran Nigam Ltd. in dated 01.04.2014 however, has direct the AO to verify the year in which the surcharge income has been offered to tax. The relevant observation in para 5 to 7 of the order of Co-ordinate Bench of Tribunal is reproduced as under:-

5. “Learned counsel for the assessee has pointed out that in so far as the issue of taxability of surcharge income is concerned, the issue is squarely covered by the judgment of Hon'ble Punjab & Haryana High Court in of 2014 dated Ist of April 2014 in the case of CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd., Hissar wherein the Hon'ble High Court while affirming the order of ITAT has observed as under: “The question that calls for an answer, in the facts of this case, is whether surcharge for delayed payment reflected in the bills raised by the assessee and its accounts, would invite payment of a tax dehors recovery/payment/receipt of surcharge. The Assessing Officer, took a view that a surcharge levied upon delayed payments of bills is reflected in the bills and the accounts of the assessee, the fact that the surcharge may or may not be paid or recovered or may eventually be waived, is entirely irrelevant as the assessee maintains a mercantile system of accounting. Aggrieved by the aforesaid finding, the assessee filed an appeal. The CIT(Appeals) vide order dated 06.11.2009, set aside the addition made by the Assessing Officer by holding as follows:-

3225/Del/2024 "The issue involved and the submissions made by the appellant have been considered. It is undisputed that the appellant is following mercantile system of accounting: it is levying surcharge on delayed payment of bills by the consumers; the surcharge is taken as income as and when it is collected, however a provision for charge is made as noted above under the head 'provision of surcharge not realized'. This method has been regularly followed by the appellant. During appeal proceedings before the undersigned the appellant has produced bills pertaining to as many as 50 parties of various places and has shown that the bills are accepted even without payment of surcharge by the consumers and that surcharge is shown in the books as income as and when it is collected/received. It is settled law that, "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a 'hypothetical income". Which does not materialize. Where income has, in fact, been received and is subsequently given up, in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account in view of the aforesaid and the Accounting Standard (AS)-1 and Accounting Standard (AS)-9, issued by the institute of Chartered Accountant of India the addition made by the Assessing Officer is deleted." The revenue thereafter filed an appeal before the ITAT, which affirmed the order passed by the CIT (Appeals) and dismissed the appeal. A relevant extract from the order passed by the ITAT is as follows:- "In our considered opinion, all the above judgment clearly favour the stand taken by the assessee. We may hasten to mention that looking at the intricacies the facts may vary, therefore, basic principles of accrual or mercantile system as laid down by various authorities are to be applied in a careful manner. The assessee being a sate PSU; the surcharge on delayed payment being disputable item; was not mandatorily payable at the time of payment of electricity consumption bill; was not an accrued receipt in view of the accounting policy accepted by the revenue. Therefore, such amount of surcharge cannot be held to be taxable as it is not the real income of the assessee and is hypothetical by nature in given facts and circumstances. In view of the foregoing, we are of the view that the amount of surcharge not realized by the assessee, does not amount to accrued 3225/Del/2024 of receipt taxable as income, CIT(A) has rightly deleted the addition, which we uphold." We have duly considered arguments but are unable to accept the contentions advanced by counsel for the appellant. Admittedly, Rs.2,25,18,23,535/-was added by the assessing officer as reflecting levy of surcharge on delayed payment of bills. Admittedly, this amount has neither been paid nor recovered by the assessee. Admittedly, the surcharge is a disputable item and may at any time be reduced or waived and, therefore, despite the fact that the assessee maintains a mercantile system of accounting, the ITAT and the CIT (Appeals) have rightly set aside the order passed by the assessing officer adding surcharge to the income of the assessee. It would be appropriate to point out that income tax is fundamentally a levy on income and though the Act may prescribe different points in time at which liability to taxation ensures still remains a tax on receipt of income. A hypothetical income that may or may not materialize should not be made subject matter of tax merely because of an entry in the accounts books maintained by an assessee. A reference in this regard may be made to a judgment of the Hon'ble Supreme Court in "Commissioner of Income-tax Vs. Shoorji Vallabhdas and Co." [1962] 046 ITR 0144, wherein it has held as follows:- "Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even through an entry to that effect might, in certain circumstances, have been made in the books of account.” In view of what has been recorded hereinabove, we find no error in the impugned orders and while dismissing the appeal record that as and when the assessee receives payment of surcharge, it would be obliged to pay tax on such amount.”

3225/Del/2024 7. In the case of Dakshin Haryana Bijli Vitran Nigam Ltd. (supra) there was CAG audit which fact is missing in present so Assessing Officer has to verify the fact as to when the surcharge was realized and offered as income. Thus while allowing the grounds in all the appeal covered by this issue, we direct the assessing officer to consider the claim of the assessee after verifying the year in which the surcharge income has been offered to tax.”

ITA 25. In the final result, appeal of the assessee in No.961/Del/2023 [AY 2018-19] is partly allowed and appeal of the Revenue in [AY 2018-19] is dismissed.

Order pronounced in the open Court on 19.11.2025.